Will internal devaluation work?

Edward here again. I was talking to my friend Rob Parenteau about internal devaluation. He doesn’t think it will work. His argument against it is similar to the one I have been making about the origins of this crisis. Here’s what I said.

I do not believe this private sector balance sheet recession can be successfully tackled via collective public sector deficit spending balanced by a private sector deleveraging. The sovereign debt crisis in Greece tells you that. More likely, the western world’s collective public sectors will attempt to pull this off. But, at some point debt revulsion will force a public sector deleveraging as well.

And unfortunately, a collective debt reduction across a wide swathe of countries cannot occur indefinitely under smooth glide-path scenarios. This is an outcome which lowers incomes, which lowers GDP, which lowers the ability to repay. We will have a sovereign debt crisis. The weakest debtors will default and haircuts will be taken. The question still up for debate is regarding systemic risk, contagion, and economic nationalism because when the first large sovereign default occurs, that’s when systemic risk will re-emerge globally.

Rob puts why internal devaluation is not a plausible strategy differently. Here’s the flow of his argument.

  1. Many nations try internal devaluation at the same time;
  2. Private sectors have debt to income ratios that well exceed public debt to income ratios;
  3. Credit to households to supplement buying power (in excess of wage and salary) is unlikely to be forthcoming given the mess in the banking system and the falling price of (real estate and equity) collateral;
  4. Many nations are pursuing multiyear fiscal consolidation, which is proving far from expansionary to date;
  5. Many countries around the world are already trying to run export led growth strategies, and not only is it impossible for the whole world to run a current account surplus, but there is no market or policy mechanism insuring that the current account surplus nations reinvest their net savings in productive investments in the current account deficit nations that will allow the current account deficit nations to service their external liabilities without defaulting.

Rob encouraged me to re-read Chapter 19 of Keynes’ General Theory, saying

“We know these deflationist arguments inside out. We know why lowering wages is unlikely to introduce a self-stabilizing return to a full employment growth path.”

I skimmed through Chapter 19 on “Changes in Money-Wages” as Rob suggested. Here’s the quote that bears remembering:

“the volume of employment is uniquely correlated with the volume of effective demand measured in wage-units, and that the effective demand, being the sum of the expected consumption and the expected investment cannot change, if the propensity to consume, the schedule of marginal efficiency of capital and the rate of interest are all unchanged. If, without any change in these factors, the entrepreneurs were to increase employment as a whole, their proceeds will necessarily fall short of their supply-price.”

Yes, that is where I was going with my thoughts yesterday on manufacturing inflation in a wage deflationary environment. I said that “until incomes rise enough to support the debt (numerator) or you get enough credit writedowns so that incomes support the debt (denominator), it’s not going to work.” What I meant was that we have household sector balance sheet problems. Unless you fix the debt/income number instead of the debt/GDP number, the balance sheet problem remains. Eroding the real burden of debt is dependent not on raising nominal GDP, but on raising nominal income to keep pace with consumer price inflation. A lot of economists are talking about ‘market-clearing’ wage prices, that is lowering incomes, to reduce unemployment. That will make the debt problem larger and leads to a debt deflationary outcome.

Bottom line: you won’t cut your way to prosperity. While you need to see a lot more credit writedowns to get through this crisis, the best one can hope for from the deflationary path is a reduction in debt from these defaults and writedowns with debt deflation attenuated by automatic stabilizers. This outlook is especially true when you see a collective debt reduction across a wide swathe of countries in both public and private sectors as we saw in the 1930s and as we are seeing again today.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. rn

    My two cents worth of responses.

    I think it is a problem of income/wealth inequality/ distribution. There is probably some optimal level of inequality to sustain economic growth.

    It may be possible to lower wages across the board )with reduced level of inequality,) to bring back economic growth.

    I wish some economists do serious research on inequality to understand depressions.

    1. rd

      Current income inequality levels in the Us are similar to the late 1920s. We know what followed then, and we seem on track to follow a similar path now.

      Income inequality was MUCH lower in the 50s and 60s which seems to be the golden age of US growth over the past century.

      While I am always careful about correlation vs. causation, there are probably some strong linkages here that are not coincidence.

      I will note that sensible regulation following basic principles of the financial sector appears to coincide with lower income inequality while high income inequality appears to coincide with unfettered speculation in the ifnancial sector. Some leash on the animal spirits may be necessary.

      1. Anonymous Jones

        Some have posited that it is the very process of going from relatively equal wealth distribution to relatively unequal wealth distribution that generates outlier growth numbers.

        These same people predicted that China’s growth would outstrip India’s because the communist revolution leveled the playing field and set the stage for massive transfers of wealth from the masses to new oligarchs.

        I am agnostic regarding this theory. It is interesting, however. Depressing, but interesting.

    2. joebhed

      The income -wealth distribution gap manifests itself in the difference between the creators of monetary assets, who own these ‘money-based’ debt instruments of various colors and flavors, and the restofus, who pay the interest on those monetary assets. Forever through compounding interest.

      Through “financialization, the pace and scale of the monied enrichment of the few has erupted noticeably over the past dozen years, but it has been underway from the times of the earliest of financial deregulation, and before.

      You cannot attack wealth mal-distribution without attacking the tools and vehicles of its success – the private creation of purchasing power by the financialistas and the capital marketeers who create NOTHING of real wealth in the real national economy.
      And if you want to end that, then you better understand how the monetary system works.
      And take it back.
      Because it does not work for the restofus.

      For the Money System Common.

    3. liberal

      “I wish some economists do serious research on inequality to understand depressions.”

      The current depression is not caused by income inequality; rather, both have the same root cause: economic rent.

    4. nonclassical

      ..actually this fits nicely with Michael Hudson’s article on “debt deflation”; both appear accurate..especially given
      historical documentation on 30’s era depression..

  2. friend

    I am trying to follow along.

    What I am weakest on is “how”?

    I get (think I get) that bad debts have to be written down. Some folks will absorb pain.

    The who and how much is fuzzy to me.

    Can you give the practical way forward? Or a couple possibilities, if that occurs to you?

  3. Jim Haygood

    Probably the most successful example EVER of an ‘internal devaluation’ was Frank Roosevelt’s 40% devaluation of the dollar from 0.0475 to 0.0286 troy ounce of gold during 1933-34.

    Mind you, I don’t approve of his high-handed seizure of privately-held gold, and nullification of gold clauses in bonds (the sole technical default in U.S. history, according to Reinhardt and Rogoff).

    But the internal devaluation against gold stopped the raging deflation in its tracks, and ushered in a recovery until 1937.

    Owing to another high-handed act by Nixon in 1971, such an officially-decreed internal devaluation is now impossible … although the market has imposed one on its own.

    What the gold market knows is that irredeemable fiat currencies are one of the few real-world examples of that phenomenon which so scandalizes the editorial page of the Times-Titanic: the dreaded ‘race to the bottom.’

    With the incomparable Benny Bubbles chairing the Fed, that’s a race we can win, by God.

    USA No. 1!!!

    1. joebhed

      As you said, it was necessary to stop the gold-flavored deflation that was spiraling us to ruin – that’s why FDR did it.
      That’s what leaders do – what is needed.
      And it was hardly a seizure, as I understand the word.
      All the gold was accumulated by the government in order to restore the economy to its potential, and the original holders received the price that the gold was worth in $US.
      It seems a small price to get America working again.

      1. Eric

        It was a seizure by any reasonable definition of the word. The legitimate holders of a certain property were obligated to give up that property at a price that was imposed on them by an entity that both had and was willing to use (and, in fact did use) coersive forces to compel the transaction. But it did accomplish what was intended economically.

        This is entirely speculative, but I think there is a good possibility that the set of citizens that are currently heavily invested in gold – particularly those that physically keep it – and the set of citizens that are heavily armed, relying on second amendment rights, might overlap substantially. I don’t think that sending out Treasury agents, FBI or others would work as effectively today as in the 1930s.

    2. reslez

      Owing to another high-handed act by Nixon in 1971, such an officially-decreed internal devaluation is now impossible … although the market has imposed one on its own.

      Yes, quite a shame we’re no longer on a gold standard so we can unshackle ourselves from it again. /sarcasm

      The equivalent could easily be accomplished by sufficient tax cuts or federal spending. This need not be matched by debt issuance. When there’s a shortage of money the solution is not to shrug your hands in helplessness, the solution is to create more money. “Revulsion”… please get serious. We have 30 year mortgages under 4%.

  4. Dan Kervick

    This is a great post Edward. But I have a question about the Keynes post. Doesn’t an increase in employment increase the propensity to consume?

    1. Dan Kervick

      I meant I had a question about the Keynes quote, not post.

      Alas, if only Keynes were with us now, with a blog of his own!

      1. alex

        “if only Keynes were with us now”

        He’d be so disgusted he’d stop commenting. “You idiots have learned nothing in over 70 years, indeed you’ve forgotten what you did learn then.”

    2. Mel

      It can, but without a net effect.

      If you double the number of people employed by halving the wage paid to each — sure you may have doubled the ‘propensity’ to consume (desire) but you’ve halved the money.

      By my formula, demand = desire * money stays exactly the same.

  5. TulsaTime

    No finish line in that race to the bottom. It’s only over when the last one stops, when the financial devastation is complete. The nice thing is that we for sure will not have to worry about sky-net at that point!

    Real war pulls the plug on the greatest depreciation contest. Although I don’t know who would be fool enough to buy the bonds for that one.

    1. nonclassical

      ..rumour is huge middle-east conflagration on the way..Iran
      and others including U.S. or U.S. proxy Israel..

    2. Sy Krass

      Actually, war will not have the same impact now as it did in the 40’s. All the ordinance has been manufactured, such a war if it were to come would be quick, destructive, not very profitable, and oil would go up. Not a recipee for recovery in my book.

  6. joebhed

    Hhmmmm…. – the financial-economic intelligencia have come to the same conclusion as the world’s central bankers – the jig is up, and we don’t know what to do.

    The national enigma is stated succinctly in the new (HR-2990) version of the Kucinich Bill, Finding No. 10 states –
    “”(10) Congress is stymied by competing forces: a desire to put people to work and an aversion to borrowing money to create programs to do so.””

    This aversion to borrowing money is caused by economy-wide debt-saturation, which is in turn brought about by our debt-based money system.

    Ed and Rob, searching for any fix that will restore aggregate demand(a desire to put people to work) find themselves, and we, in an enigma somewhat wrapped in a riddle, similar to the HR 2990 Finding.

    So, it’s a chicken and egg situation, in which NO PROGRESS can be made. The economists and the financialists are, hopefully, very slowly discovering the pre-eminent reality of the national economy – it is based on a monetary system THAT CANNOT WORK.

    The sooner y’all get that, the sooner the MMTers and the post-Keynesians can get on board with the Kucinich solution to this monetary system-based national economic paralysis.
    We need a new money system, plain and simple.

    We need a money system where we can have money to provide the means of exchange necessary without debt. To do what?
    To put the people to work.

    As Simons so eloquently stated: “The tragedy is in our learning to accept debt, and to fear money”.

    The National Emergency Employment Defense(NEED) Act of 2011 is available here.

    It’s about friggin’ time we started talking about it.

    Unless you have a better idea.
    Mr. Beard?

    1. nonclassical

      ..banks and a government BASED ON that “monetary-debt” system, and who CONTROL such, will NEVER “give it up”…

      (till it collapses-reading U.S. history)

      1. joebhed

        Well, yeah.
        We’re waiting.

        My dad, who was a christian-capitalist businessman turned monetary reformer, an avowed anti-socialist, only ever quoted this from Marx:
        “Revolution is Ninety-percent opportunity”.

        Understanding, as he did, the mechanics and mathematics of the debt-based money system, and understanding the innate ability of those bankers to create and destroy ever-larger bubbles, he advised that we would have one ‘opportunity’ to fix this thing in my lifetime – and that the one ‘opportunity’ would come about three years after we increased the national debt by a $Trillion dollars in one year.
        So, that’s why we’re here with an alternative.

  7. F. Beard

    Unless you have a better idea. joebhed

    It’s not my idea, in fact it is hinted at in Matthew 22:16-22 (“Render to Caesar …”), but we need separate government and private money supplies. Then the government could freely spend without imposing a “stealth inflation tax” on the private sector. That should silence the “deficit hawks” since they would be free to use private currencies to escape price inflation in the government’s fiat. In fact, excess fiat creation would make it EASIER for the private sector to pay taxes because the cost of fiat would drop.

    But along with fundamental reform, the entire population,including savers, should be bailed out equally with full legal tender fiat from all private debt. That could be done without serious price inflation risk if banks were forbidden to create any more credit AND if the bailout checks were metered to just replace existing credit as it is paid off.

    Politically, a bailout of the entire population should be much for acceptable than excessive infrastructure spending. Who doesn’t believe that they can spend more wisely than the government?

    1. Crazy Horse

      If a country like Iceland can default and be back on their feet within two years when their major resource is codfish, why can’t the dominant nation of the most resource-rich continent on the planet do the same?

      As appealing as the Kucinich bill is, it doesn’t clear away the deadwood. When the new American Money replaces the old private Federal Reserve Notes as the medium of exchange, what better time to start over again with economic democracy? Every citizen should receive $50,000 in new American Money as starting capital– Bill Gates and a crack dealer from the Bronx would then have an equal opportunity to display their entrepreneurial skills. Bill might initially have trouble paying the heating bill on his Mercer Island mansion, but with 60,000 sq. ft. he should have plenty of rooms he could rent out.

      I doubt if there would be a shortage of consumer demand, and entrepreneurs would grow like weeds out of the potholes in every street to satisfy that demand.

      Since there would be no exchange between the old dead and abandoned Federal Reserve currency and the legal American Money, all existing debts will be wiped out. Or better, transfer them to the newly formed public State Banks where they will be administered as a form of tax liability and help capitalize the North Dakota model public banking utility that will replace the TBTF vampire banks.

      We might have a little trouble maintaining our 75% oil importation level, but I’m sure there is something we could re-learn to manufacture that the rest of the world wants. Might even have to start manufacturing I-Pads here—.

      Totally politically unacceptable you say? I wouldn’t be so sure by the time 40% of Americans have lost their homes only to watch them be bulldozed to the ground by the Repo agents, and marchers in the street are waving AK-47’s instead of signs that say “Visualize World Peace”.

      1. Externality

        Unless you also seize the hard assets of wealthy bankers and other elites, this approach seems extremely unfair. An American with their life savings in the bank or dollar-denominated bonds loses everything over $50K, while wealthy bankers with multiple mansions get to keep their property. Consider the following:

        John Doe had $100K in the bank, and no other assets. They are left with $50K.

        Lloyd the banker has $100K in the bank, and owns $10MM mansions in the Hamptons, San Francisco, and France. They are left with $50K in money and $30MM in property.

        Ben the banker had $100K in the bank, and a $10MM mansion. He front-runs the conversion and buys Japanese Yen. He now had $50K in dollars, $100K dollars in Yen, and a $10MM mansion.

        (Names are not intended to refer to actual people.)

        This approach, in other words, would punish savers with dollar-denominated assets while increasing, in relative terms, the wealth of bankers, large landowners, etc.

        1. Linus Huber

          I do agree with you. First and foremost those looters have to be taken to account. I am not talking about the entrepreneurs but about those who enriched themselves over the past many years while not having any downside risk as well, like an entrepreneur is exposed too. The downside risk was taken over by the Government (tax payer) and they are factually simply employees who looted the system.

          This is not simply a matter of economics but a matter of fairness and justice. When the law does not resembles justice anymore due to corruption at the top, it is high to put this aspect first before considering any other economic measures. Western society is based on the rule of law but the spirit of this rule of law has been violated repeatedly and is destroying the social fabric that allows a nation to florish.

        2. Crazy Horse

          A few somewhat tongue in cheek paragraphs do not constitute an entire economic system! For instance, given the political power to institute such a radical change to the banking system, there should be no problem formulating a progressive taxation schedule for residential property. $1.00 per year for 1,000 square ft., $100,000 per year for 10,000 square ft, and ten million per year for 50,000 square ft. seems about right. Second homes assessed at double rate, third homes at triple rate— you get the picture!

      2. Kevin de Bruxelles

        The meme that the Icelandic economy is “back on its feet” is almost as silly as the green shoots meme a couple years ago. Please have a look at the hard numbers. Icelandic unemployment is now around 8%, it averaged less than 2 % before the crisis. That means it is up at least 400%. A similar jump in the US would mean our normal 5% unemployment would have jumped to and stayed at 20%. I hardly think anyone would be saying the US economy was “back on its feet” with at least four times the unemployment rate of the pre-crisis period.

        Also since Icelandic mortgages are indexed to the price of living (which is basically a reflection of the weakness of their Krona). So since the Icelandic Krona is worth half (was 90 per Euro, now 180) of its pre-crisis value, the amount due on mortgages has skyrocketed while the price of most goods has doubled since almost everything (except fish and energy for heating) is imported.

        What I was told is that almost most Icelandic men are now working 60 hours a week. They typically have full time jobs but take a second job in the tourist industry. Even with this effort they are unable to maintain their pre-crisis standard of living.

        So if all this means an economy is “back on its feet” then America and Europe must be simply booming!

        1. Crazy Horse

          I guess there are different definitions for “landing on your feet!” After doing the unthinkable Icelanders are making do by working extra hours: that in itself is remarkable. It hardly seems reasonable to hold up as the standard the living conditions temporarily achieved by a bubble economy. And by the way, how did they end up with variable principle mortgages? Looks like they didn’t twist the thumbscrews on the stocks when they had their banksters in them?

          8% unemployment in Iceland? Let me describe the economy of the community where I live in here in the USA. It is a conservative farm community that was in transition to a second home and resort area. Lots that sold for $200,000 now remain unsold for $28,000, and there are thousands of them on the market. Huntsman Springs, (yes, that John Huntsman’s sons) is a 200 million dollar golf course development so desperate for sales that they offer to buy back their million dollar condos at full purchase price anytime for ten years if you will just take them off their hands now.

          Existing home prices are down 40-50% and there are no buyers. Full time jobs in the county have been reduced by 40%, and median salaries cut by at least 40%. In the absence of out-migration, real unemployment would also be over 40%.

          Across a 8,500′ mountain pass lies the richest county in the US where ordinary lots still sell for 2.5 million each and billionaires outnumber millionaires. The unemployment rate is under 4%, but the average wage rate is $11.00 per hour, manicuring the lawns and waiting tables for the ultra wealthy. Not much left for food for the family after you pay the cost of commuting two hours every day across a mountain pass swept by two major avalanche paths.

          Families that want to hold on to their underwater home do have an option. Since there are no jobs for men, the wife can put the kids in day care and drive over the Pass to her waitress job. (by the way there is no snow plowing at night which adds to the excitement of the night-time commute) The husband can find work in the oil patch or the coal mines 300 miles to the east if he doesn’t mind never seeing his family.

      3. Moneta

        This is the same logic as the parents not getting their kids vaccinated. They are just piggybacking on the fact that everyone else is getting it done.

        Iceland’s default worked because they were the only ones to go this route while all the others printed. Had no one printed, Iceland probably would not be in a very good situation.

        I do not think they are out of the woods yet.

    2. nonclassical

      Yves has long documented the fact banks=Wall $treet are holding that debt, and amounts are secret..for good reason-
      banks would already be insolvent, as she has exposed often..

  8. Chris

    I’m having a hard time criticizing this post because it strains my brain, but I’ll try nonetheless. A few questions off the top of my head:

    1) What is internal devaluation?
    2) What in God’s name does it have to do with what Rob is talking about?
    3) How in the world can you equate Greece with the US?
    4) Inflation only affects asset prices? Really? Really???

    I really think that you were wrong when you started, you heard Robs argument, which was wrong, and you wrongly thought that he agreed with you and wrongly came to more wrong conclusions based on your wrong premises and your wrong interpretations of Robs wrong argument.

    I actually agree with parts of what you say. Your statement in the previous post that incomes will drive the recovery more than GDP is correct, but you’ll have to trust me that inflation comes with wage inflation – that’s just how it works. Creating a false choice of “internal devaluation” or “credit writedowns” is just nonsense.

    1. nonclassical

      get rid of the “greek debt” comparison and read Michael Hudson’s article on “DEBT DEFLATION”, here on NK, and it all makes perfect sense..

  9. Hugh

    A lot of this seems unnecessarily obtuse. We need both better incomes and more jobs. And as m began the thread, we need redistribution of wealth, that is society’s resources, away from the economically destructive rich (1%)back to the more productive 99% of society.

  10. KnotRP

    Quote from the transcript:

    “Our problem, then, becomes one purely of distribution. This can only be brought about by providing purchasing power sufficiently adequate to enable people to obtain the consumption goods which we, as a nation, are able to produce. The economic system can serve no other purpose and expect to survive”

  11. KnotRP

    Another quote:

    “The debt structure has obtained its present astronomical proporttions due to an unbalanced distribution of wealth production as measured in the buying power during our years of prosperity. Too much of the product of labor was diverted into capital goods, and as a result what seemed to be our prosperity was maintained on a basis of abnormal credit both at home and aboard. The time came when we seemed to reach a point of saturation in the credit structure where, generally speaking, additional credit was no longer available, with the result that debtors were forced to curtail their consumption in an effort to create a margin to apply on the reductions of debts. This naturally reduced the demand for goods of all kinds, bringing about what appeared to be overproduction, but what in reality was underconsumption measured in terms of the real world and not the money world. This naturally brought about a falling in prices and unemployment. Unemployment further decreased the consumption of goods, which further increased unemployment, thus bringing about a continuing decline in prices. Earnings began to disappear, requiring economis of all kinds — decreases in wages, salaries, and time of those employed.”

    I guess Sir Alan and Mr. Bernanke both managed to skip the lecture on the testimony of M. S. Eccles, and still get diplomas, huh?

  12. KnotRP


    “Individuals, corporations, cities, and States can not, of themselves, do anything except play according to the rules of the present money system and make their outgo balance their income, or ultimately ‘go broke'”.

  13. Ralph Musgrave

    I flatly disagree with the idea put by Edward Harrison that “a collective debt reduction across a wide swathe of countries” will “lower incomes and GDP”.

    It is phenomenally easy to reduce national debts. Step 1: print money and buy back such debts (i.e. carry on with QE). That on its own would doubtless be too stimulatory and inflationary. So (roll of drums) implement a policy which is deflationary AND which gives governments even more money with which to buy back debt. And that is . . . . raise taxes and/or cut public spending.

    As long as the inflationary effect of step 1 equals the deflationary effect of step 2, the net effect is NEUTRAL. That is, there is NO EFFECT on total numbers employed, GDP, etc etc. For more details, see:


  14. KnotRP

    On page 709 of the testimony:

    “We must correct the causes of the depression rather than deal with the effects of it, if we expect recovery with its attendant confidence and budget balancing. This can only be accomplished by government action tending to raise the price level of raw products and increasing employment, thus bringing about an increased demand for consumers’ goods”.

    Unfortunately, Ben is only raising raw product price levels….employment cures remain out of his reach,
    in our global economy. Rising raw product prices without increasing employment just speeds up the death spiral.

  15. KnotRP


    “…and consequently there is a great demand for the inflation of our currency, the remonetization of silver, or the reduction of the gold content in the dollar, with the idea that any one of these three methods would increas our volume of money and thus raise prices, relieving debtors and bringing about prosperity. None of these three, in my opinion, would accomplish the results desired unless a method would be provided for getting the increased supply of money to the ultimate consumer”.

    I think Ben must’ve nodded off and missed the last sentence.

    1. joebhed

      Thanks for these many relevant quotes, but keying on this phrase here…
      “…unless you start the purchasing power at the source with the consumer”.

      This is an incredible proof of what is needed, and ought to occupy this discussion entirely.

      Bernanke acts as if we can jump-start the economy by putting Trillions into the banks’ excess reserves – thus foolishly pushing on the economic string.

      For an updated critique of Fed monetary policy under the debt-based system of money, please see our YT vid on ‘Bernanke’s Monetary Impotence’.

      The only real solution to implement the suggestion contained there – that of directly getting purchasing power to the consumer – is that ‘situationally’ adopted by most MMT advocates – the direct spending by the government of the additional monies into the economy – so that it lands at M1, maybe gets velocity above 1:1 , and creates aggregate demand.

      However, the real solution is to restore fully the monetary sovereignty of the nation and issue ALL money without debt, followed by bank lending of real money.
      That is exactly what the Kucinich NEED Act of 2011 (HR 2990) does.

      For the Money System Common

      1. Jerrydenim

        Loving your comments on this thread Joebhed! I’ve been preaching the monetary reform gospel for years now. If only we could break through to the Ron Paul gold bugs we would have enough citizens on board to start effectively advocating for reform. Maybe somewhere down the line abolishing the privatized debt-based money system could become the central thrust of the OWS movement. There’s a impromptu altar set up in Zuccotti park for people to meditate, pray, etc where people have been leaving little votives and offerings. It struck me as the tragic irony of ironies, and bothered me to no end that some people are leaving Federal Reserve Notes on the altar! How tragic that some who care enough to protest greed, inequality, corruption etc. are so blind to think it appropriate to leave the filthy paper notes of our collective oppressor in a sacred place of protest against that very same dark force?

        We must do more to get the word out.

        1. F. Beard

          If only we could break through to the Ron Paul gold bugs Jerrydenim

          That’s easily done. Agree with them that anything can be used for private debts – gold, silver, common stock, store coupons, futures contracts, etc.

          However for government debts – taxes and fees – inexpensive fiat is the ONLY ethical money form. That’s non-negotiable since anything else is fascist privilege for someone’s favourite shiny metal or other money form.

        2. joebhed

          A lot of Paulistas are mad as hell about the private monopoly’s privilege of creating purchasing power out of nothing and collecting interest if paid, and collateral if not.
          They honestly believe that those in government understand this relationship and support it. I do not know three people in Congress who actually understand fractional-reserve banking, but they all know from where their money comes.
          Unfortunately, most of the Paulists believe that a switch to gold backing would actually add stability to the currency and reduce government growth and debt.

          I don’t agree with Henry Ford. I think the American people need to understand the money and banking system completely.
          Because I believe we need a revolution in the morning.
          For the Money System Common.

          1. F. Beard

            the private monopoly’s privilege of creating purchasing power out of nothing joebhed

            The temporary money, so-called “credit”, is created out of nothing but the purchasing power is stolen from all other money holders. The taking of purchasing power (at least temporarily) is inevitable when new money is created which is why the current money owners should be allowed to vote on new issue. Common stock as money fulfils that ethical requirement; bank credit does not.

  16. KnotRP

    same quote continues:

    “It does not make any difference what kind of inflation, if the inflation is adopted — you can print money, you can remonetize silver, you can reduce the gold content of the dollar and it is not going to raise your price level unless you start the purchasing power at the source with the consumer”.

    Consumers….Bankers…..what’s the difference….lets just give it all to the bankers….it’s easier.

  17. KnotRP

    “Senator Gore: And in 1929 the turnover [monetary velocity] was 45 times?
    Mr. Eccles: Yes.
    Senator Gore: But in New York City the turnover was over 150 times.”

    They note, in the discussion, that turnover dropped from the “norm” of 26-32 times per year, and the high of 45, down to 16 by the last quarter of 1932, and was still dropping.

  18. KnotRP

    Senator Gore: But currency alone is about 25 or 30 per cent more.
    Mr. Eccles: Yes; but it is not working.

  19. KnotRP

    More: (sorry, but this is fascinating….)

    “Several factors to-day stand in the way of increasing our money velocity.
    I repeat there is plenty of money to-day to bring about a restoration of prices, but the chief trouble is that it is in the wrong place; it is concerntrated in the larger financial centers of the country, the creditor sections, leaving a great portion of the back country, or debtor sections, drained dry and making it appear that there is a great shortage of money and that it is, therefor, necessary for the Government to print more. This maldistribution of our money supply is the result of the relationship between debtor and creditor sections — just the same as the relation between this as a creditor nation and another nation as a debtor nation — and the development of our industries into vast systems concentrated in the larger centers. During the period of the depression the creditor sections have acted on our system like a great suction pump, drawing a large portion of the available income and deposits in payment of interests, debts, insurance and dividends as well as in the transfer of balances by the larger corporations normally carried throughout the country.”

  20. KnotRP

    “Point No 1. Unemployment relief. …..(plan laid out, worthwhile to read itself, but ends with the following)…..We shall either adopt a plan which will meet this situation under capitalism, or a plan will be adopted for us which will operate without capitalism”.

  21. KnotRP

    Senator Gore: Where does the Federal Government get this money to give [ed: gift] to the States.
    Mr. Eccles: Where did it get $27,000,000,000 during the war to waste?
    Senator Gore: A very different situation

    So this was all in 1933, and it still went on until WWII, despite such clear and thoughful testimony….and all we have now is knuckleheads….we’re screwed.

    1. Calgacus

      Aaaargh. “Gift” is a weird, recent neologism up with which I will not put. “Give” here is still standard written & spoken English.

      and all we have now is knuckleheads Yup. You can’t overestimate the insanity & stupidity of the last 4 decades of economic “thought” & politics. MMT/PostKeynesians & other practitioners of non-insane economics have a ways to go to get the general level of understanding of economics back to the level of the 40 years after 1933. Or even before. Around 1920, “loans create deposits”, say was the standard, mainstream, belief.

      1. KnotRP

        Eccles used the term “gift” elswhere in the testimony, to distinguish it from “loan”….apparently “give” left room for interpretation in the Senators’ minds….

  22. KnotRP

    The testimony spirals into an argument with the Senators about the practical problems with directing so much money at the targets Eccles desires….all the usual corruption/skimming concerns. No wonder it’s called the Great Depression now…we lacked the will to do the only thing that would actually work….cut every citizen a check each month until price levels and employment returned to stable levels. Not. Gonna. Happen. GDII.

  23. KnotRP

    Senator Walsh: When do you think prosperity will come back?
    Mr. Eccles: It depends entirely on what the Government does. It will not come back unless action is taken by the Federal Government, in my judgement.
    Senator Walsh: Do you think there is anything to the claim that this period now is more or less a period of normalcy?
    Mr. Eccles: No; we cannot stay at this level. If you can not raise the price structure [edit: and also grow employment through direct action, as he mentioned earlier] you will go into a condition of collapse and you will get into a chaotic condition far worse than we are in to-day.
    Senator Walsh: We have been slipping for three and a half years. When is the slipping going to stop?
    Mr. Eccles: I have said when the Government takes the necessary action to stop it.
    Senator Wlash: In other words, we have done nothing in the last three and a half years to stop this?
    Mr. Eccles: I think not.
    Senator Gore: All our efforts have come to naught?
    Mr. Eccles: That is what I think. I think nothing has been done except to extend credit, and credit is the second line of defense and not a primary line of defense.

  24. KnotRP

    “….we have destroyed the ability to buy at the source through the operation of our capitalistic system, which has brought about such a maldistribution of wealth production that it has gravitated and gravitated into the hands of — well, comparatively few. Maybe several millions of people. We have still got the unemployment and have got no buying power as a result”

  25. KnotRP

    Senator Gore: Let me ask you this. I do not mean for you to dilate on it. But you say our credit structure is in danger. And I think it is. I think our mischief results largely from overstraining credit. Your proposals seem to be that for the excessive use of credit we use more credit. Is that not true?
    Mr. Eccles: No; that is not true.
    Senator Gore: It seems like every scheme you suggest was for the Government to advance money to somebody.
    Mr. Eccles: You have got to take care of the unemployed or you are going to have a revolution in this country.
    Mr. Eccles: When you get enough unemployed they will control the Government and change our present political, social, and economic system.
    Senator Gore: There is the trouble And that is the danger here. They brough pressure to bear in the House to get tabacco, butter-fat, and goobers included in this domestic allotment. you get enough unemployed in this country organized and there are no brakes you can put on your scheme. That is the history of Rome. The dole destroyed Rome. It is going to destroy England and France and Germany and this country.
    The Chairman (Reed Smoot): We thank you for your statement, Mr. Eccles.

    So….we can’t be having a dole, so all that remains as an outlet is social disruption, followed by war.

  26. KnotRP

    Of course, Mr. Eccles wasn’t suggesting a dole at all. He was suggesting the government become the employer of last resort and deploy the productive capacity on necessary production and services in exchange for pay, to prime the economy, instead of doling out money to unemployed wasted resources as they sit around picking navel lint.

  27. Maju

    You don’t need to go into debt to print money: you just print it by decree. Forcing the state to accept debt in order to print the money that the economy needs is a nefarious devaluation of the sovereign power of the state, one that harms the economy.

    As long as you do not devalue so much that others do not accept it, the state can print all the money the national economy (or, in the US case, the imperial economy) needs.

    There’s a problem if all countries devalue simultaneously but, even in that case, the injection of money into consumers’ pockets (via salaries and welfare, not via lending to banks as the central banks do) should dynamize the economy.

  28. Philip Pilkington

    Yes. Other reasons internal devaluation won’t work:

    From Chapter 19 of Keynes: If you reduce wages et all, then tax revenues will fall further exacerbating public debt-to-GDP ratios (because income taxes and VATs will fall). If the object is to bring these public debt-to-GDP ratios down this is a paradoxical strategy.

    From a conversation between me and Rob (!): We must assume quite a lot of price stickiness in consumption driven economies like Ireland etc. Businesses will defend prices even at the expense of layoffs. So, when (if?) wages fall the price stickiness will lead to pro-cyclical effects (more unemployment, lower wages etc.). Hence: downward spiral.

  29. jake chase

    If the authorities are interested in solving demand stagnation the solution is quite simple. A one time distribution of $50-100k per US adult. This would get the debt carrousel moving again with minimum inequity.

    If this sounds ridiculous, imagine that they have already distributed $23 trillion to the banks and the top .002 of the population without any effect except to make everything worse.

  30. ArkansasAngie

    Then you have the case of the globals. They don’t care about no stinkin sovereign this, that, or the other. Especially since the central banks are using them as their macro locks and dams.

  31. Moneta

    There is income inequality in the US but it also exists at the global level.

    I don’t see more equality coming to America unless we see huge changes. What I see is more equality across the planet… i.e. engineering wages in China and other emerging markets jumping up to match those in developed markets. And the more debt America sells to foreigners, the bigger chance this will happen, unless it defaults on its obligations.

    And if America truly fights this global phenomenon by becoming protectionnist, inflation will be huge.

  32. JP Hochbaum

    Considering we have the unlimited capacity to pay off sovereign debt, I fail to see how we could ever have a soveriegn debt crisis.

    Devaluing our currency is a decent policy choice because it makes our debt cheaper to pay off and will increase our exports, which will increase wages and jobs here.

    1. Moneta

      The issue is that since the US has the reserve currency, most countries are set to export. Every time the US dollar wekens, they will also devalue making it hard for the US to export.

      Furthermore, since their economies are built around exports, it will take some time before they can purchase US exports.

      In my mind the US will be able to increase exports only id they lose the reserve currency status or if emerging makets gain important purchasing power which will only increase the fight for resource domination.

      The force behind the status quo is huge.

  33. Paul Tioxon

    While the Fed sped into action to prevent asset price deflation, wage deflation has gone on, unabated. During the landmark New Deal legislation, minimum wage levels were established. While seemingly idealistic or progressive at face value, they also serve to protect the higher wage paying industrialists of the era and spread enough money, in the form of a floor on wages, that would guarantee a predictable level of demand.

    However, the main beneficiaries of the new wage mandates, were Southern industrial workers, not agricultural workers and share croppers who were waived, to this day, from minimum wage legislation. By setting a wage floor that was already well established in the North, it raised the much lower levels of wages and income primarily in the South. This created a national labor market where there was a level playing field and Northern industries did not have to fear for being undercut by low cost Southern competition.

    The main point is, increasing wages and income was as much a priority as stabilizing collapsing farm produce prices. Corporations around the world, taking advantage of this crisis as a good time to discipline the work force, suppress wage demands and even lower compensation or get rid of high cost older workers and replace them with cheaper, new, younger hires, who don’t remember the higher wages and benefits, is all contributing to the squeeze on economic recovery.

    You can’t stabilize asset prices, and collapsing commodity prices without commensurate stabilization of salaries, wages and benefits. If prices stay the same, and wages go down, it is inflation by another name, it produces the same result, the erosion of purchasing power. Prices and wages are in relation to one another. You can’t work to save one and work to destroy the other and expect anything but disastrous consequences.

    1. No Know

      “You can’t work to save one and work to destroy the other and expect anything but disastrous consequences.”

      IMHO, you have summarized precisely why we are where we are!

    2. KnotRP

      minimum wage requirements are not equivalent
      to deploying the unemployed in public works projects
      for pay. The first only says “IF I hire you, I have to pay you X”…that’s a big IF.

      We have water issues (crumbling dikes, floods, droughts, power generation), we have power issues (old distribution plant, R&D on new energy production methods, power consumptive home equipment), we have transportation
      problems (the 99 percent commutes from the
      area they can afford to buy a home in, to the more
      expensive area where their jobs are). Plenty of useful
      targets from which to pick a big (moon in 10 years) fish
      to fry….with subsequent benefits to our nation.

      Too bad we’re a bunch of dumbasses with 2 second attention spans….we can’t do anything that requires organization and persistence beyond one business quarter or election cycle, unless our lives are directly threatened. I guess we’ll have to wait for that…

      1. reslez

        Too bad we’re a bunch of dumbasses with 2 second attention spans….we can’t do anything that requires organization and persistence beyond one business quarter or election cycle, unless our lives are directly threatened. I guess we’ll have to wait for that…

        To quote Lambert Strether, who’s “we”? The 99% see the problems and want them fixed. It’s the 1% who stymie everything so they can loot.

        1. KnotRP

          The looting has been going on for a while (literally years), and “we” (royal) haven’t managed to do much as a population, until recently…..and yet the looting actually continues unabated even today. But lives are being deconstructed by the “suction pump” (to quote the Eccles Testimony), so I expect after many years of the 99% sleeping though this (as long as free credit was available) that enough people’s lives have become threatened to bring this to a boil…

    3. decora

      well according to some people, the Commodities Index Funds and the electronic ‘dark market’ of commodities trading have caused mass inflation in food and fuel. (and indirectly the food riots of 2008, and the melamine baby milk scandal in China)

      sooo how you gonna deal with that? the New Deal hired a big crook to go after the other big crooks, but now who do we have?

      Obama can assassinate American citizens without trial, but if he tries to break up a bank his own aides disobey his direct orders and others call him a communist

      (nevermind Bush’s direct question to Paulson, about how it came to pass that a company could get so big its failure would take down the whole system. I guess that makes Bush a commie too. but i digress. )

  34. Heron

    So, if I’m reading you right, doesn’t your theory suggest that a more successful strategy would require something like, say, Central governments paying off citizen debt to private industry? Or is it less a direct debt issue, and more a “we need higher wages to service debt” issue?

  35. VietnamVet

    Excellent Comments.

    Several posts mentioned “Price Stickiness”. What is really sticky is the wealthy holding on to their assets. Two steps are needed: 1) The wealthy have to take a haircut on their bad debt and casino bets. No more taxpayer bailouts. 2) Government has to hire workers until unemployment reaches 6%. Simple. The alternative is the Second American Revolution.

    1. No Know

      You’re on the right track Vet. As a fellow Vietnam Vet (11 Bravo), we both know how to solve the problem that baffles all of the econ geniuses out there — pay every body with MPC like we got paid. No banks, no debt…just good old spendable cash for our fine services. Might have to make the printing presses work a little harder because I doubt anyone would even show up for what they paid us (and that included combat pay!). Either way, I think you nailed what the alternative scenario will be.

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